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Get & Give Tax Help for Small Businesses

S corp vs. W-2

I recieved this question earlier today:

I have another twist on this question. I have been working under an S-corp for 5 years. My main client would like me to go on W-2. Can I still do this and take my business deducttions. I would work for the major client 60-70% of the time, and would still have other clients.

Or, what happens if I worked for one client exclusively? I would still meet the requirements as a consultant.

Sure no problem.

You can continue to take legitmate business expenses even to the point where it reduces your net income to a net loss.

Any expenses that are specifically for your W-2 client I would report on Form 2106 as an unreimbursed business expense. Any other general business expenses should go through your S-corp.

You can use S-Corp loss to offset other income including your W-2 income. The caveat it that you can only deduct a loss the the extent of your basis.

The basic formula for determining your basis in an S-corp is:

contributions + taxable income - taxable loss - distributions

This is a bit of a simplification but it works for most situations.

Say you put in $1,000 of your own money to get your company started and then lost $500 the first and made $3,000 net income for the next 3.

Your basis is $9500 (1000 - 500 + 3000 + 3000 + 3000).

Given these assumptions you can use any S-Corp losses up to $9500 in the coming years.

Working for only one client is fine. Your control over the work is more important. See IRS Pub 1779 for more information: